Peter Mathews (Dublin South, Fine Gael)

This is a big topic where it could take a lot of time to go through the chronology of events to describe the story of why we are here today and in this state. Deputy Niall Collins suggested the Government Members do not live in the real world. The only reason I am here today is because I was in the real world two years ago and I prepared figures and facts, along with some other people, that showed what was happening and the establishment, including the Government, the Administration, the professions and the banks, did not want to hear about it. The biggest property and credit bubble that had ever been seen exploded and it was up to everyone to admit to the scale of the losses but they refused to do so. The Government and the establishment decided in a panic to give the guarantee. It was illogical to include in that guarantee bond investors because they were never going to be able to run on the banks because they had scheduled redemption times. Only depositors could cause a run on the banks. It was reasonable, therefore, to guarantee deposits but perhaps unreasonable to guarantee all the bonds. The Government did it for a period of almost two years.

In the immediate aftermath it then decided the NAMA project would be a way to separate the bad loans from the six banks and to deal with them while leaving the remaining banks without those bad assets to provide credit and liquidity to the economy because the bonds that would buy the bad loans could be used as collateral at the ECB to provide the liquidity and credit the country needed.

However, those involved did not use their heads, although they could have, because the Americans had considered a similar project called the toxic asset purchase plan. Following five or six weeks of laboratory bench testing, the Americans realised it would not work for many practical and other measurable reasons. They decided, with egg on their faces, not to proceed down the road of a plan which, our Government informed us through a public relations and propaganda machine, was the only show in town and which would do what it said it would do. This was despite the views of many people, including myself, who could demonstrate that the six balance sheets of the banks presented on a combined basis showed that in the period of six months from the beginning of the guarantee, effectively from the end of 2008 through to June 2009, notwithstanding the State guarantee over all deposits, including deposits paying premium rates, a total amounting to €32 billion left the country. This was because people did not believe there was a sound capital base for the banks, sufficient to absorb losses that would have to be written down.

The NAMA project had the temerity to try to persuade us that €23 billion of losses would be the total amount throughout all six banks and that this was the figure needed to absorb losses in the meltdown following the collapse. From where do I get the €23 billion? A total of €77 billion of loans were to be bought for €54 billion. This implied €23 billion of losses would have to be recognised. However, NAMA went further and stated that losses would not even amount to €23 billion because it would make a profit of €5 billion over ten years such that the net loss would amount to only €18 billion. That was absurd, even at that stage. However, it suited the possibility of keeping out of majority State control the two major banks and it left open the question of what to do with Anglo Irish Bank and Irish Nationwide.

This brings us through to March 2010. The NAMA project was proposed with a supplementary budget in April 2009. Luckily, the Dáil did not agree to provide an open cheque and agreed that NAMA would have to come back with the figures. The figures with which the Minister returned included one figure of €77 billion and another of €54 billion for loans to be bought from the five institutions out of six. That was announced on 16 September. The following Monday, I presented the combined balance sheets of the banks to show this project would not work. I also explained how the meltdown had occurred and that it was not because Lehman Brothers had gone bust but because the loan-to-deposit ratios in our banks had an average of in excess of 170% which is financial stupidity and carelessness.

In September it was insisted to everyone here, in the Seanad and even to the President, Mrs. McAleese, that the Bill must be enacted into law. Then began the slow admission, bit by bit, that loan losses would be greater than €23 billion. It reached the stage where, in March of last year, that is, this time last year, the prudential capital assessment review, PCAR, showed that Allied Irish Banks would require €7.4 billion and Bank of Ireland would require €3.5 billion in capital before the year-end to sustain losses. It was claimed that this would be sufficient for the banks to be totally refuelled and to be able to absorb losses. This was not the case because even on an overview basis of the portfolio, an examination of the loans which had been identified for transfer to NAMA and the application of a 40% level of loan write-offs, it was clear that AIB would need €10 billion and Bank of Ireland would need €6.5 billion before the year-end.

Despite presentations to the Joint Committee on Finance and the Public Service in the Leinster House 2000 building, conventional wisdom and the establishment said "No" and that they knew they got it right. However, it was not right. This brings us through to 30 September 2010. The revised measurement of estimated losses in the banking system were totted up to €50 billion. That was it; that was black Thursday. However, again it was not right because these estimates did not address the losses that will come down the tracks on mortgage lending. Based on the facts and figures at the time, a better estimate would have indicated that a total of €65 billion was needed on the NAMA type bonds throughout all banks and, for prudential reasons, perhaps a further €30 billion to absorb losses and to make provision against mortgage loans for the next number of years. This is from where the figure of €95 billion comes.

Deputy Pringle suggested there was a discrepancy between the figure announced last Thursday, a €70 billion capitalisation, and the figure of between €90 billion and €95 billion which I mentioned. However, there is no discrepancy; there is a reconciliation. The explanation is that the €70 billion is based on the €47 billion which has been invested by way of capital to date throughout the banks. This is not a figure from losses. When one adds to this the €24 billion referred to in the most recent announcement, a total of €70 billion arises. This is capitalisation and does not address the two moribund banks, Anglo Irish Bank and Irish Nationwide. In these banks the provision of losses to date is approximately €30 billion. There are bonds in these two remaining banks of up to €4 billion which could absorb any more losses and this is why the figure was parked to one side.

The achievement of last Thursday - it is an achievement - is that an announcement of a restructuring of the banking sector was made involving banks that are viable, that is to say, the two large banks as well as EBS. They will form a structure which will provide a framework for the starting point of the recovery and which is sufficient for a starting point. This is a picture which allows us to get a fix on the amount of loans in the six banks, at approximately €170 billion, mainly provided by the European Central Bank and the balance by our own Central Bank.

This figure includes emergency liquidity and it derives and has a provenance from the funding or the redemption of the senior bonds which were redeemed up to the end of last year. At the moment, the banks are funded by the capital which has gone in from the State, the ECB, Central Bank funding, senior bonds which have not yet been redeemed and deposits. Basically, these are the ingredients.

We should get the picture across to our counterparts in Europe. We are part of a bigger family and we are keen to be able to work constructively, to recover in this economy and not to distribute the losses unfairly to any party. Then, we present the fact that the losses are of the order of €95 billion. The amount of funding in place at the moment includes redemption of senior bonds up to the end of last year. To this extent, these bond investors have not contributed to or have not been presented with any of the losses to date. Therefore, what could be done and what is in prospect to do is to present to our counterparts in Europe the big, true, holistic picture and to consider restructuring of these loans in the banks on the basis that they may be partially written down, swapped for equity or whatever. This amounts to is the start of a negotiation and is not in conflict with the excellent work done by the Government and presented by the Minister for Finance. It is a clearer picture with more certainty of the engineered structure for the banking sector and the beginning of the way forward.

Mr. Trichet, Mr. Rehn or whoever in Europe may have stated that at the moment they take the view that there will not be restructuring, including a write down of bonds either from the remaining bondholders throughout all the banks or in some of the banks.

That is a discussion that can be re-presented.

There is no place for the intemperate language of burning bondholders. This is a professional presentation that should be done on a negotiated basis. When companies go into receivership or examinership and there are historical creditors that may remain future suppliers, everything is done on a negotiated and well understood basis, and that is still in prospect. I am confident that if the picture is presented in the right way and in the right language with firm presentation and persistence that the discussion can open because suppliers and creditors of either a business or a nation want to see the people with whom they engage survive and prosper. It is in everybody's interest. That is why I appeal to Members on all sides of the House to take this approach. It is the collegial and co-operative approach. It is the one that is based on facts. It takes the intemperance of language out of the picture and it shares the bill for something that has happened in a proper way or at least it addresses it and presents it in a proper way.

I remind some of the journalists abroad who might have said that while Ireland partied Europe worked, which is a comment I have heard made, that Europe and these institutions which invested in the bonds made a return on them and to date they have been fully redeemed bar only those that were subordinate bonds and were bought back in the market. The people who say that need to rethink what they say. I invite people to take a temperate and considered approach to all these things.

However, we will work forward. Ireland has a going concern basis. Exports are working well and in the domestic economy, now with the start of restructuring the banks and the load of the two main utility or pillar banks having been lightened, there will be the prospect of economically breathing again, but all of us must take a co-operative approach and one of laying out the full facts.

When it comes to measuring losses, it is not like taking a temperature. There is not a given such as 102° or 103° Fahrenheit; it is a well-judged estimate. The consulting firm Black Rock Solutions and Barclays Capital have models that look forward 12 years and they work back to what are capital requirements for the first three years. The other way is to admit the full scale of the losses and then to examine where that bill fairly rests and how to divide it. Then we need to examine what loans remain in the banking system, how can they be borne and if they are sustainable and, if not, like creditors in a restructuring of a company, we should write them to the reasonable level of starting point or try to reach agreement on that and move forward, as well as pricing it right for interest rate agreement.

We have got the right starting point. It is more certain as a starting point and it now depends on the mindset and preparedness to negotiate persistently, truthfully and in a balanced way. I am confident that like gravity the right financial solutions will be understood and the political will to put them in place will be achieved.

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